A Review of the Nigerian Energy Industry

Concerns mount over rising banks’ dollar-denominated debts

US Dollar27 August 2014, Lagos –  Industry watchers have expressed worries over increasing rate of dollar-dominated debts on deposit money banks’ balance sheets.
Five banks – Zenith Bank, Access Bank, Diamond Bank, First Bank of Nigeria and Ecobank Nigeria have so far raised a total of $1.750 billion from the dollar denominated debt market this year.

In addition, four Nigerian banks had earlier taken advantage of the opportunity in the market and issued Eurobonds valued at $1.45 billion between January 2011 and July 2013.

In July 2013, First Bank issued $300 million Eurobond, Fidelity Bank’s $300 million Eurobond sold in May 2013, Access Bank issued $350 million Eurobond in July 2012, while Guaranty Trust Bank’s $500 million Eurobond was issued in May 2011.

According to Central Bank of Nigeria (CBN), dollars accounted for 24.8 per cent of total deposits of commercial banks as at June 2104.

This therefore raises the question whether there are open US dollar positions carried by Nigerian banks.

Data from the CBN also showed that there has been build-up of US dollars in the deposits of Nigerian banks since 2005.

For instance, FBN Holdings Plc indicated about 28 per cent of its deposits in US dollars, while the net interest margin (NIM) on the US dollar portion of its balance sheet is in the region of three to four per cent, compared with the eight per cent to nine per cent in naira.

Also, Zenith Bank Plc has 28 per cent of its deposits in foreign currency and 23 per cent of that is in US dollars, whereas the NIM on the dollar portion of its balance sheet is less than five per cent.
Similarly, GTBank has over 24 per cent of its deposits in US dollars, while the United Bank for Africa Plc also has 22 per cent of its deposits in US dollars.

Most US dollar deposits in the Nigerian banking system are under one year in duration.

In a chat with THISDAY, Banking Analyst at Afrinvest Securities Limited, Mr. Ayodeji Ebo expressed concern over the rising dollar-denominated debts by Nigerian banks, especially from the Eurobond market for on-lending to the power and oil sector.
He argued that banks’ lending to the power sector may crystallise into currency exposure in the future.

“The revenue from the power assets comes in naira, but they borrowed in dollar. So, if they need to pay back, they would do so in dollar.

“So, there is a form of exposure to currency risk as a result of mismatch of the currency. While cashflow is in naira, the capital was raised in dollar,” he maintained.

But analysts at CSL Stockbrokers Limited noted that although the CBN encourages banks to balance their foreign currency positions, it may be the case that there are substantial open US dollar liability positions.

To this end, it warned that a devaluation of the naira could expose banks to significant and direct risks.

“There are plentiful US dollars in the deposits of Nigerian banks, but a severe shortage of long-term US dollars that can be used as tier-2 capital,” CSL added.

The report noted that managing the mismatch of duration between US dollar funding and US dollar assets has become a critical skill in Nigerian banking, and those banks with well-developed investment banking arms generally have shown an advantage in this regard.

The Nigerian banking system last underwent major stresses in 2009 with a non-performing loan (NPL) crisis exacerbated by a high level of margin lending and related-party lending.

The liquidity aspects of the crises were dealt with by the CBN and the National Deposit Insurance Corporation (NDIC), while the CBN took over several so-called failed banks and closely monitored the remaining so-called healthy banks.




– This Day

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